November 9, 2010
Wayne, WA 61306
November 9, 2010
Chairman & CEO
Los Gatos, CA 98416
Dear Mr. Hastings:
Attached is our recommendation for the future of Netflix.com. In this report, you will find that we have taken an extensive look into the subscription business model that you have chosen to forecast the future of your company. We have reviewed your long-term objectives and performance to date. We have also delved into the central elements of the subscriber model, as well as constructed a prospective model to forecast the expected cash flows for the next five years. This forecast model helps to analyze the possibility of acquiring new subscribers. Using this model, we furthermore examined the estimated value of Netflix.com.
As a result of our findings, we believe that you should continue to use the subscriber business model to forecast the future of your company. We feel that the value of your company will grow with the addition of new subscribers, particularly unlimited package customers. With the advent of growing technology we believe that these customers will continue to purchase your services, especially when they are able to stream videos online, on demand. We do feel, however, that revenue sharing is not a profitable addition to your business; therefore we recommend that you forgo this business plan.
Thank you for the opportunity to look in to your business. If you have any further questions feel free to contact us.
Netflix is faced with the main objective in July of 2000 of making an attractive and successful public offering in the NASDAQ market. In order to meet their objective the firm has to show positive cash flows within the following twelve month period (keeping in mind that the years 1998 and 1999 showed a negative income). The financial officer is in charge of re-evaluating the cash flow requirements of the company’s current business plan, and suggesting any modifications for the projected cash flows. He also has to project sales, new subscribers, and ways of attracting and retaining customers for more than one month. Netflix also has the opportunity to capitalize on the potential to enter the video-on-demand market, which can create value and position them as an industry leader featuring the digitally streamed videos. They are counting on the advancement of DVD technology and internet for establishing significant market share and turning them into an industry leader. Effective deployment of such objectives can help to achieve these goals.
In order to meet these goals Netflix offers many features to attract customers. Use of a subscriber model that forecasts projected sales, costs, and potential subscribers can assist in assessing the effectiveness of their business plan. One of the features that Netflix offers is a free month of service with the purchase of a new DVD player. The costs of giving out a free month add to the some $16.4 million in sales in marketing expenses. However, this promotional incentive is crucial, as it can help to attract customer and retain them as paying subscribers.
Netflix management’s subscriber model also contains all the expected costs and cash inflows. Using this same model they can calculate the cash flows associated with retaining a customer beyond a six month period. This can also help to calculate the percentages of customers that are most likely to continue paying for the subscription after six months.
Some other features that the company uses are the marquee queue, revenue-sharing, movie-finder, and video-on-demand. The Marquee Queue allows customers to make a list of their preferred movies from which they will be mailed out movies starting from the top of the list, as soon as the previous movies are returned, and so on. According to the business plan, a subscriber has an...